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Accounting for Risk: developing a new research agenda for risk appraisal in high-technology ventures

  • Gavin C Reid
  • Julia A Smith

This work concerns the development of new methods of accounting for risk in high-technology ventures. The paper enquires into attitudes to risk and skills at risk management, in the relationship between high-technology firms and their venture capital backers. The basic prescription behind the proposed approach, building on work by the authors and co-workers [Reid (1996,1999), Reid, Terry and Smith (1997)], and other recent developments [e.g. Fiet (1995a,b)], is that as the venture capital industry matures, so should the techniques which high-technology firms and their venture capital backers use for risk management. If total risk is split up into innovation risk, business risk and agency risk, the main category of risk which hitherto the venture capitalist has sought to attenuate is agency risk. This has been addressed through improved management accounting systems, post-investment, and pre-commitment to the installation of such systems, pre-investment. However, success in this area has been incomplete, and attention to business and innovation risk has been severely limited. Lack of overall success in risk handling has, as a consequence, been a major cause of failure to provide adequate levels of outside finance for high-technology ventures, if appropriate yardstick comparison is made with US practise. This paper proposes a new research agenda, and a corresponding methodology, for investigating methods used for managing innovation, business and agency risks in investor-investee relations.

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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9915.

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Date of creation: Oct 1999
Date of revision:
Handle: RePEc:san:crieff:9915
Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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  1. Gavin C Reid & Nicholas G Terry & Julia A Smith, 1995. "Risk Management in Venture Capital Investor-Investee Relations," CRIEFF Discussion Papers 9505, Centre for Research into Industry, Enterprise, Finance and the Firm.
  2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  3. Murray, Gordon C. & Lott, Jonathan, 1995. "Have UK venture capitalists a bias against investment in new technology-based firms?," Research Policy, Elsevier, vol. 24(2), pages 283-299, March.
  4. Ruhnka, John C. & Young, John E., 1991. "Some hypotheses about risk in venture capital investing," Journal of Business Venturing, Elsevier, vol. 6(2), pages 115-133, March.
  5. Fiet, James O., 1995. "Reliance upon informants in the venture capital industry," Journal of Business Venturing, Elsevier, vol. 10(3), pages 195-223, May.
  6. Gavin C Reid, 1998. "The Application of Principal-Agent Methods to Investor-Investee Relations in the UK Venture Capital Industry," CRIEFF Discussion Papers 9810, Centre for Research into Industry, Enterprise, Finance and the Firm.
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